Rumor Mongers of Summer

It’s like being in a hall of mirrors this evening. But instead of being filled with mirrors, this hall echoes with furtive whispers about potential acquisitions involving networking-industry notables.

Some of these rumors are unadulterated disinformation, propagated for one reason or another by vested interests (of which, I can assure you, I am not one).

In fact, before I continue, allow me to make full disclosure (as opposed to full monty, which is another thing entirely) and issue an important disclaimer: I have no financial interest or investment position in any of the companies or rumors I am about to discuss. If you should be foolhardy enough to trade on uncorroborated information presented in this blog post, you should seek psychiatric and financial help forthwith.

I will tolerate a lot of nonsense around here, but I will not countenance anybody blaming me for the loss of hard-earned money on the stock market. Buyer beware — and a little paranoia probably doesn’t hurt.

Okay, with those formalities out of the way, let’s get started on the sudden wave of madness that overtook the Intertubes beginning this afternoon. The rumors have been rife, coming from all manner of cranks, dealers, freaks, and schemers. One of these rumors might even prove to be true, but don’t count on it.

At this moment, one can hear chatter of Dell interest in Brocade; of IBM interest in Juniper; of a technology integration involving F5 and Juniper that might result in something more; of HP acquiring Fortinet; of Arris talking with suitors; and of Huawei, not Nokia Siemens Networks (NSN), being the company Motorola is trying to interest in its telecommunications-equipment business.

Meanwhile, a few crazies even think Cisco is kicking RIM’s tires. In my view, Microsoft — once it shakes off the cold sweats and horrific flashbacks associated with its gruesome Kin debacle — is more likely to troop to Waterloo with checkbook in hand.

It’s the middle of summer, but the industry natives are restless for hot-and-heavy investment-banker action. The investment bankers are ready to put on a show, too. The question is, will vendors pull the trigger on a deal or deals?

We can only wait, watch, and listen.

Thoma Bravo Sees Promise in SonicWALL’s UTM Plans

A reader asked me to comment on the acquisition of SonicWALL, so that’s what I’ll do now. Yes, I sometimes take requests, just like a washed-up lounge lizard.

The announced transaction has been well documented in the business and trade press. An investor group led by private-equity firm Thoma Bravo, and comprising the Ontario Teachers’ Pension Plan, will acquire SonicWALL in a deal worth approximately $717 million. SonicWALL shareholders will receive $11.50 per share in cash, a 28-percent premium over Wednesday’s close.

The deal already is being challenged by law firms alleging that SonicWALL and its board of directors breached fiduciary duties by agreeing to the proposal before diligently seeking an offer that would have provided better value to shareholders.

I don’t want to step into that fray, because it’s an inherently subjective debate based on market estimates from analysts who might or might not have applied accurate assumptions, methodologies, and statistical models. I have no idea how some analysts arrive at their forecasts — some perform thorough channel checks and build intricate spreadsheets, while others perform Santeria rituals with live chickens on neighborhood baseball diamonds under the cover of darkness.

I think you take my point. That said, I will note that the premium offered looks at least superficially attractive. What’s more, the fevered response to it from the wealth-redistribution agents of the legal profession tells you that SonicWALL is an asset that is not bereft of hope and promise.

Indeed, SonicWALL is a strong UTM-firewall and point-product security vendor in the SMB/SME space and across a number of vertical markets, including government, education, and healthcare. The company has built a strong channel presence, and its channel partners generally have a favorable view of the company.

In its latest quarter, just before this acquisition hit, its results did not suggest obvious signs of distress. You can do the math and employ your multiples based on those numbers, but this deal is about what the buyers think the company is worth going forward, not on what the company has done historically. My point regarding the recent financial results, though, is that SonicWALL’s wheels were not falling off.

SonicWALL faces a lot of competition in an Internet-security market that is consolidating on multiple fronts. Security functionality is consolidating, as evidenced by jack-of-all-trades UTM boxes from the likes of Fortinet and SonicWALL; and the market is consolidating, too. Bigger vendors are buying point-product purveyors in attempts to become one-stop shops for the security needs of SMEs and large enterprises alike.

That’s why SonicWALL’s management chose to do this deal. Thoma Bravo not only brings money to the table, but also a potentially coherent plan as to how SonicWALL fits into its existing stable of Internet-security and infrastructure companies. In previous transactions, Thoma Bravo has acquired security-management firm Attachmate, application and database-tool vendor Embarcadero Technologies, and authentication vendor Entrust. Conceivably, SonicWALL will benefit from access to this technology ecosystem and to its sales channels.

Meanwhile, Thoma Bravo saw considerable growth potential in SonicWALL. The vendor holds its own in the SSL VPN market, where it has about a 20-percent share, but the real promise is in UTM, which really is the next-generation firewall.

According to Frost & Sullivan, the UTM market was worth nearly $2 billion in 2009. The market-research firm expects UTM growth to increase through 2010 and 2011 before moderating in subsequent years.  Nonetheless, if the market researchers are right, the UTM space will reach revenues of $7 billion in 2016. With SMEs and distributed enterprises expected to account for the vast majority of those sales, SonicWALL is well placed to benefit.

This is where we have to come back to the competition, though. The company faces not only Fortinet, which rode to an IPO on its UTM exploits, but also Internet-security heavyweights such as Cisco, Juniper, and, to a lesser extent, Check Point.

One factor that could work in SonicWALL’s favor is that Cisco doesn’t seem as focused on Internet security as it has been. Not only has Cisco suffered from component shortages that deferred and cut into sales of its ASA boxes, but the Internet-gear colossus seems distracted by shinier, glossier market opportunities. Cisco also is less focused on serving SMEs than on catering to its large-enterprise and service-provider customers.

Looking ahead to the changing security demands occasioned by increasing virtualization and the adoption of cloud computing, SonicWALL is developing a new security God-box architecture under an Austin Powers-like moniker, Project SuperMassive. The company describes it as a “next-generation security platform and technology capable of detecting and controlling applications, preventing intrusions, and blocking malware at up to 40 Gbps without introducing latency to the network.”

According to SonicWALL, Project SuperMassive will implement a patented Reassembly-Free Deep Packet Inspection (RFDPI) engine to “provide increased insight into inbound and outbound network content without compromising security or performance.” SonicWALL says its new technology will intercept network threats that come from “anywhere and everywhere” and “scan everything.”

It all seems impressive, but the proof is in the pudding, or — in this case — the UTM. However it turns out, Thoma Bravo is buying a company with no shortage of technological vision.

As a postscript to this note, I will say that HP bears watching in the space. It’s possible, though by no means certain, that HP will acquire a vendor such as Fortinet to fill a gap in its HP Networking security portfolio.

Fortinet Enjoys Impressive Trading Debut

Fortinet’s IPO launched today. It went about as well as possible, with the shares, trading under the symbol “FTNT,” up $4.12 (32.96 percent).

I provided an overview on the Fortinet IPO yesterday, and what transpired today was consistent with my expectations. As a quality company, Fortinet offered a quality IPO. The market, which hasn’t seen many new technology issues in recent years, was appreciative.

From here, Fortinet shares might face some headwinds. With the company’s shares jumping impressively on their first day of trading, Fortinet now has a significantly higher market capitalization than it had before its stock began changing hands. That factor must be considered carefully in any assessment of buying into the company’s shares at the current price.

Examining the chart for Fortinet’s first day of trading, I see that its stock surged as soon as it hit the market, hitting $17.18 per share. It then dipped as low as $16.53 per share at about 11:44am Eastern before bouncing its way to a closing price of $16.62.

All in all, it was a good day for Fortinet, its financial backers, and its underwriters. As mentioned above, the market hasn’t seen many strong information-technology issues recently.

Fortinet Trades Tomorrow

When I composed my earlier post regarding Fortinet’s IPO, I was under the mistaken belief that the company would have its NASDAQ trading debut today.

As it turns out, Fortinet will begin trading under the “FTNT” symbol tomorrow morning.

Fortinet’s investment-banking underwriters — Morgan Stanley, JPMorgan, and Deutsche Bank — have the option to buy up to 1.9 million additional shares to address overallotments.

Overview of Fortinet IPO

Proffering advice on whether others ought to buy into a company on its first day of public trading always is a tricky business. At any given moment, one has only limited visibility into the company’s prospects, the industry to which it belongs, and the health of the overall market. Things change — often with alarming speed.

It goes without saying that plenty of caveats, provisions, and reservations attend any recommendation. Still, I feel good about the immediate prospects of Fortinet, the unified threat management (ATM) security-appliance vendor that begins trading today under the “FTNT” symbol.

I don’t know whether the company will be successful in the longer-term against larger competitors such as Cisco, Juniper, and now HP (through its 3Com acquisition) as it attempts to take a bigger share of the high-end enterprise and service-provider market segments, but in the near term, it seems like an investment that can deliver some pop.

Fortinet makes appliances that integrate several security capabilities into a single box. Any customer that buys from Fortinet gets a security appliance that providse anti-spam, antivirus, firewall, VPN, IPS, and web filtering all in a single system. For the Fortinet customer, the value proposition is that a single appliance can deliver the security functionality of multiple point products, leading to savings in product-related security costs and in the ongoing management of devices and vendor relationships.

That said, the strength of a UTM appliance also is its weakness. I would not say that Fortinet is a jack of all trades and a master of none, but I would contend that many large enterprises might be inclined to select a best-of-breed application-security appliance over a broad-based UTM box.

As of now, according to information provided in the Fortinet prospectus, the company’s product sales are evenly divided between its low-end, midrange, and high-end models, with each product class accounting for about a third of sales. A perception lingers that UTM solutions sell mainly to small and midrange companies, and not to larger enterprises, and Fortinet cites that perception as a risk in its prospectus, particularly in light of its desire to get more business from high-end enterprise, government, and service-provider customers.

Unlike Cisco, Fortinent doesn’t have much in the way of a direct sales force. Its sales are made through its channel partners, comprising distributors, resellers, and some specialized integrators. That strategy covers a lot of ground and helps defray cost of sales, but it can also be a weakness in some large accounts.

Another potential weakness for Fortint is its reliance of open-source software for various facets of its security functionality. Fortinet argues that its “secret sauce,” if you will, is its FortiASIC hardware, which is optimized for accelerated processing of security and networking tasks. It also has its underlying FortiOS, an operating system that provides a foundation for application-security functionality.

Above those two technological cornerstones, however, one will find open-source software that Fortinet has licensed to provide disparate security functionality. With such code in play, there always is a danger, as Fortinet’s history attests, of patent-related litigation. Fortinet has been down that litigious road before, and it readily concedes that further courtroom drama could ensue.

Fortinet has has a lot of R&D in China, as well as in Canada (Vancouver), and in the USA. The China-based R&D will provide it with cost advantages over many competitors.

In the second quarter of 2009, market-researcher IDC said Fortinet had about 15.4 percent of the worldwide UTM market. According to IDC projections, the market will grow from $1.3 billion in 2007 to $3.5 billion in 2012, representing a compounded annual growth rate (CAGR) of 22.3 percent. In its prospectus, Fortinet said it has shipped more than 475,000 appliances to more than 5,000 channel partners and 75,000 customers worldwide — including more than 50 customers in the Fortune Global 100 — during the first nine months of 2009.

Regarding that latter point, my observation is that Fortinet would like deeper penetration in those high-end Fortune 500 accounts. Although it has cracked Fortune 500 companies, Fortinet’s account presence often is at a small number of branch offices rather than throughout the organizations. As much as it resists the notion, Fortinet probably would reluctantly concede that UTM products traditionally have enjoyed more success in SME accounts than in high-end enterprises.

Fortinet reported revenue of $123.5 million, $155.4 million, and $211.8 million for its fiscal years 2006, 2007, and 2008, respectively. It says it had revenue of $152.7 million and $181.4 million in the first nine months of fiscal 2008 and 2009, respectively. I regard as a strength the geographical diversification of Fortinet’s revenue mix. In first nine months of fiscal 2009, 37 percent of total revenue came from the Americas, 37 percent from Europe, and 26 percent from APAC. Since 2006, more than 60 percent of Fortinet’s revenue has been derived from outside the Americas.

For its size, the company has accrued a respectable amount of cash. Fortinet has generated positive cash flow from operations since 2005. Operational cash flow has grown from $3.4 million in fiscal 2005 to $37.7 million in fiscal 2008. During the first nine months of fiscal 2009, the company saw positive cash flow from operations of $45.8 million.

With the company’s revenue coming from product sales as well as from subscription-based services, the latter have provided a significant and growing source of recurring, high-margin revenue. That’s all good. As long as new customers are brought into the fold, subscription-based revenue will continue to proliferate and Fortinet will continue to generate meaningful operational cash flow.

Given the cash it is spinning and the proceeds it will derive from today’s IPO, Fortinet should be reasonably well placed to fortify itself, through acquisitions or other means. Although some factors are beyond its control, it is positioning itself strongly for the competitive struggles ahead.

The company has a good, battle-hardened management team. It’s a balanced group, with business and technological acumen. Fortinet also has been through some trials and tribulations. This isn’t a group of neophytes. The company has met adversity and endured.

Nothing lasts forever and nothing is a sure thing, but Fortinet comes into its IPO in good health, and with the near-term prospect of trading above its opening price range of $9 to $11 per share.

It now will sell 12.5 million shares instead of the originally planned 12 million shares.

Fortinet IPO Next Week

Fortinet will have its IPO next week, with its shares trading under the symbol “FTNT.”

IPO Interactive is rating the Fortinet initial offering as “hot.”

I have had the Fortinet prospectus in hand for a while now, and I’ll be providing my assessment of the company and its stock shortly.

Fortinet IPO All Set to Go

With the price range and size of Fortinet’s initial public offering (IPO) all set, we now await the first trades, which almost certainly will occur before U.S. Thanksgiving. At least some of the smart money believes Fortinet will be trading under its “FTNT” symbol in a little more than two weeks.

Fortinet expects to sell 12 million shares for between $9 and $11 apiece. Based on a midpoint price of $10, the IPO is expected to raise $120 million, according to a Reuters report.

Of the shares reaching market, about 52 percent are being sold by the Silicon Valley firm’s financial backers, leaving Fortinet with expected net proceeds of approximately $52.4 million. The company’s executives and directors own 59 percent of the company, while venture-capital firm Redpoint Ventures owns 15.2 percent and Meritech Capital holds 10.8 percent, according to the prospectus. Other investors include Acorn Campus Ventures, Defta Partners, DCM, and WI Harper Group.

The Deal.com reports that Fortinet raised more than $93 million in aggregate VC funding, whereas PEHub says the company has raised $83 million in VC funding since 2002.

Morgan Stanley, J.P. Morgan, and Deutsche Bank Securities are serving as co-lead underwriters; they will be given the option of purchasing an additional 1.8 million shares.

Layoffs at Fortinet?

Fortinet, a vendor of security appliances and a market leader in unified threat management (UTM), is rumored to be shedding staff. The company’s website says it has more than 1,000 employees.

As I learn more, I’ll provide an update.

Fortinet filed for an IPO during the summer. At the time, the company disclosed neither the price range of the offering nor how many shares it would issue. According to Morgan Stanley, a lead underwriter for the offering, the IPO prospectus is not yet available.

More on Watchguard’s BorderWare Acquisition, Fortinet Late Bid

The terms were not disclosed regarding WatchGuard Technologies’ acquisition of BorderWare, which was announced earlier this month.

But I have additional details in hand, and can reveal that the WatchGuard acquired BorderWare for $7.9 million.

Additionally, WatchGuard assumed some financial obligations pertaining to 50 BorderWare employees who will remain in the fold subsequent to the acquisition. In the press release (cited in the above paragraph) announcing the deal, WatchGuard states that BorderWare had 90 employees.

Interestingly, Fortinet expressed belated interest in BorderWare, but the former already was involved in a strategic transaction — probably relating to Woven — and could not commit to closing a deal for BorderWare within the time limits imposed by BorderWare’s increasingly anxious financial backers.